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Proposed regulations from the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury, when finalized, will require certain business entities to file, in the absence of an exemption, information on their “beneficial owners” and “company applicants.” FinCEN is expected to adopt the final regulations under the Corporate Transparency Act sometime later this year or next. This alert summarizes the requirements of the proposed regulations to help you take steps now to prepare for their implementation.

What Companies Are Subject to the Reporting Requirements?

Subject to certain exemptions, the reporting requirements apply to all entities that are created by filing a document with a secretary of state or other similar office of a State or Indian tribe. They also apply to all entities formed under the law of a foreign country that register to do business in any State or tribal jurisdiction by filing a document with a secretary of state or other similar office of a State or Indian tribe.

There are a large number of entities that are exempt from the reporting requirements, most notably:

  • Entities that (1) employ more than 20 full time employees in the United States, (2) have an operating presence at a physical office in the United States, and (3) have filed a Federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales excluding gross receipts or sales from sources outside of the United States.
  • Issuers of securities registered under Section 12 of the Securities Exchange.

Act of 1934 (Exchange Act) or that are required to file supplementary and periodic information under the Exchange Act.

  • Governmental authorities.
  • Section 501(c)(3) tax exempt entities, political organizations, charitable trusts, and split-interest trusts and entities that operate exclusively to provide financial assistance to, or hold governance rights over, such entities.
  • Pooled investment vehicles that are operated or advised by a bank, credit union, registered broker-dealer, registered investment company, registered investment adviser, or certain venture capital fund advisers.
  • Inactive entities in existence on or before January 1, 2020 that have no foreign ownership, no assets (including interests in other entities), no change in ownership during the last 12 months, and have not sent or received funds in excess of $1,000 in the last 12 months.
  • Many types of highly regulated entities, primarily in the financial services industry.1
  • Subsidiaries of exempted entities, other than subsidiaries of money transmitting businesses, pooled investment vehicles, or entities assisting 501(c)(3) tax exempt entities, political organizations, charitable trusts, and split-interest trusts.

What Are the Required Reports?

Initial Reports

An initial report for entities formed (or, in the case of foreign entities, registered) after the effective date of FinCEN’s final rule will be required to be filed with FinCEN within 14 days after such formation (or registration).

Entities that have been created (or, in the case of foreign entities, registered) before the effective date of FinCEN’s final rule, will have up to one year after that effective date to file an initial report with FinCEN.

An initial report will require the following information about the reporting company:

  • Full name and address.
  • Trade or fictitious names used.
  • Jurisdiction of formation or, in the case of a foreign company, jurisdiction in which first registered.
  • Taxpayer Identification Number or, if not yet issued, the reporting company’s Dun & Bradstreet Data Universal Numbering System number or a Legal Entity Identifier.

An initial report will require the following information with respect to each beneficial owner and each company applicant:

  • Full legal name.
  • Date of birth.
  • Current address.
  • A unique identifying number from a non-expired passport, driver’s license, government-issued ID, or identification document issued by a State, local government or tribe.
  • An image of the document containing the unique identifying number used and photograph.
Updated Reports

Companies required to file initial reports must file an updated report within 30 days after there is any change in the information reported to FinCEN, including any change with respect to who is a beneficial owner and any change in the information previously reported for any beneficial owner or company applicant.

Correcting Reports

A reporting company must file a corrected report within 14 days after becoming aware or having reason to know any previously reported information was inaccurate when filed and remains inaccurate. A corrected report filed within that 14 day period will provide a safe harbor from the civil and criminal penalties under the Act for the inaccurate report as long as the corrected report is filed within 90 days after the inaccurate report was filed.

Who Are Beneficial Owners?

The term “beneficial owner” has a different definition than under most laws. It is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.

Substantial Control

Substantial control of a reporting company includes:

  • Serving as a senior officer.
  • Having authority over the appointment or removal of a senior officer or a majority or dominant minority of the governing body.
  • Directing, determining, or deciding important matters.
  • Any other form of substantial control over the reporting company.

The proposed regulations observe that substantial control may be exercised through a variety of means and provide some examples.

Ownership

For the purposes of determining whether an individual owns or controls 25% or more of the ownership interests of a reporting company, ownership includes through equity interests, capital or profits interests in the case of limited liability companies or partnerships, proprietorship interests, and instruments convertible or exercisable for the foregoing interests.

Ownership or control may exist through 1) having joint ownership of an undivided interest in an ownership interest, 2) control of an ownership interest owned by another individual, 3) being the trustee of a trust having authority to dispose of trust assets, 4) being certain trust beneficiaries, or 5) being the grantor or settlor of a revocable trust.

Minors, nominees, persons whose only interest is future inheritance, creditors, and employees not acting as senior officers are excluded from the definition of beneficial owner.

Who Are Company Applicants?

The company applicants that must be included in a report are the individuals that file the document that creates the reporting company or registers the foreign reporting company, as well as any individual that directs or controls the filing of such document by another person. The proposing release indicates this could be an employee of a business formation service or law firm.

What Can You Do To Prepare Now?

There are certain steps you can take to prepare for the final regulations before they are promulgated.

Determine Whether You Will Be a Reporting Company

The first step will be to determine whether your company fits within any of the reporting company exemptions. If it does, there is nothing more to do pending the final rule. While the proposed rule is not final, the exemptions in the proposed rule are also contained in the Corporate Transparency Act. As a result, they are unlikely to change in the final rule, although the Act provides the Treasury Department with limited authority to create additional exemptions.

Develop a Process to Gather the Required Information

If your company does not fit within an exemption, it would be prudent to establish a process to make sure you can capture the information needed to determine who your beneficial owners are. A process will also need to be established to identify the beneficial owners of any companies you form or register after the effective date of FinCEN’s final rule, given the proposed short 14 day window to file a report for those new companies.

  1. Banks; credit unions; bank or savings and loan holding companies; registered money transmitting businesses; broker-dealers, securities exchanges, clearing agencies, and other entities registered under the Exchange Act; investment companies and investment advisers registered with the Securities and Exchange Commission; venture capital fund advisers that have filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV with the Securities and Exchange Commission; insurance companies; state licensed insurance producers; certain entities registered with the Commodity Futures Trading Commission under the Commodity Exchange Act; public accounting firms registered under the Sarbanes-Oxley Act of 2002; public utilities; financial market utilities designated by the Financial Stability Oversight Council; and pooled investment vehicles operated or advised by a bank, credit union, registered broker-dealer, registered investment adviser, registered investment company, or venture capital fund adviser.